I'm agnostic on the Fair Tax idea. I agree that it could be a good deal for say a 22 year old, fresh out of college, but what about people who've been working and saving for a while?
Let's say I'm 65 years old and have $1,000,000 in Muni bonds paying 4%. I'm happy to collect my $40,000 every year and now the fair tax comes along and suddenly my tax free income gets hit with a 24%, 19%, or whatever sales tax rate. What do Fair Tax proponents have for people who no longer have income tax obligations?
Under the FairTax, income - no matter from what source - is not taxed. Only consumption is taxed and used (already taxed) things are not taxed again. This puts the amount of tax you pay squarely under your control since you determine your own consumption.
To get one view of how pre-taxed savings could benefit, check this post.
Once again, your tax free income is still tax free. It's taxed only when you spend it for taxable things. And, don't forget, you also receive the prebate (unless you don't want it - it's optional).
Let's say you're married and that for 2006 you spent your entire $40,000 on taxable things. You'd have an effective FairTax rate of 11.73% since you'd have available a prebate of $4,508 to offset a good bit of your taxes. And with a little frugality you could do a good bit better while your tax-free investments continued to grow tax free.
And keep in mind, too, that if you spend the entire $40,000 under the present tax system, you'll pay tax in the form of hidden taxes that are embedded in everything you buy (whether new OR used).
In your case and assuming there is a 12% decrease in prices due o the removal of the income tax (keep in mind there's a 7.65% difference just in the Employer portion of payroll taxes alone plus the business income taxes), and spending all the $40,000 with no other taxable income you'd have a slight gain in purchasing power of something like) 0.31%. While that may not be much, if you economize by spending only, say, $34,100 (maybe putting some extra investments to work since they're tax free) you'd bump your purchasing up by from 0.31% TO 2.52%.
That's a heckuva' lot better than a poke in the eye with a sharp stick and there's no gift or estate tax to be concerned and no AMT and no filing or reporting of any sort of paperwork about your income of any sort to the government - it's none of their business.
It's called FREEDOM!!